The Game of Cloud Chicken

Cloud service contracts are nice, but the big money is in building private clouds.

NEW YORK ( TheStreet) --There is a great game of "cloud chicken" now taking place among vendors and in the press of which investors need to be aware.

The game is to report a huge "cloud" contract and make it appear that some vendor has a customer locked up. In fact, most of the contracts being signed today are either for cloud services -- the kind you'd get in any public cloud -- or for standard software hosted in a cloud environment.

A bad decision on cloud services would be what Ovum consultant Steve Hodgkinson calls a Type I mistake. A bad cloud service decision is a recoverable error. It's another thing to commit a Type II error, he writes, to build yourself a bad cloud.

Most of these larger "private cloud" contracts are yet to be signed. When they are, they will be big news. Most of what I'm seeing so far is more fog than cloud.

The deal getting the most attention is the $600 million, 10-year agreement Amazon.com ( AMZN) reportedly signed with the Central Intelligence Agency. Reports quoting Federal Computer Week, which broke the story, make it appear Amazon is actually going to build a private cloud infrastructure for the agency.

This would be a very big deal because, while Amazon is known as the leader in the public cloud market -- a utility anyone can access -- it was not thought to be a player in private cloud, on-premise systems accessed only by insiders.

But a close look at the story shows Amazon hasn't won all the CIA's business at all. The FCW story emerged from remarks made at public conferences like the one organized by the Open Source Software Institute conference last month, where military-related contractors were brought together with vendors in hopes of saving money on future cloud infrastructure deals. It's the first step in a long process that will eventually result in multi-billion dollar deals, organized by existing military contractors.

When the CIA builds a full private cloud, in other words, the contract will be much bigger than $60 million/year, and probably won't be reported in the media.

Most of the "cloud" deals being announced right now turn out to be simply software contracts.